Finance Bill

Mr.
Hands: On a point of order, Mr. Atkinson. We
have not had a chance to discuss whether the Opposition amendments are
being
withdrawn.

The
Chairman: The Opposition amendments were not the lead
amendments in the group. If the hon. Gentleman wants to press any to a
vote, he should let me know and they can be moved at the appropriate
point.

Schedule
40, as amended, agreed
to.

Clause
86

Oil
assets put to other
uses

Question
proposed, That the clause stand part of the
Bill.

Mr.
Hands: Thank you, Mr. Atkinson, for your
guidance on our amendments to schedule 40. I assume that it will be
convenient to discuss schedule 41 at the same time as the clause. The
issue addressed by schedule 41 is another aspect of the problem that I
raised in relation to clause 83 and schedule 38. Because of its size
the relief on decommissioning costs assumes such importance that it can
override all other considerations when a field is nearing the end of
its life.

One of those
considerations is the potential to adapt the infrastructure already in
place to use fields for gas storage, carbon capture or wind power.
Having taken oil or gas out, it is possible to pump gas or the carbon
emissions from an onshore power station back in. That is the basis of
carbon capture and storage. But that requires leaving the pipes and all
the other related infrastructure in place. Companies are under a legal
obligation, as we explored on clause 83 and schedule 38, to remove all
that infrastructure from the seabed when it is deactivated. As the
legislation stood, had they allowed a change of use, companies would
have had great difficulty in recouping the decommissioning costs later,
which is the basis of the measure today.

Column number: 508

3.30
pm

As
the Governments November paper
found,

Industry
argue that effective access to decommissioning relief is a critical
issue when considering the economics of a change of use project, and
that the current treatment is extremely likely to result in a change of
use activity not going ahead where it utilised existing infrastructure
that was expected to have a substantial decommissioning
cost.

In
other words, we are looking at tax relief for decommissioning
infrastructure and at whether we want to encourage its use for other
purposes, such as carbon capture and storage, wind power and so
on.

Carbon
capture or schemes involving power generation do not fall within the
North sea ring fence. Equally, there are clear potential benefits from
allowing infrastructure to be reused. Schedule 41 represents the
Governments view following many years examining the problems of
and opportunities for change of use. We welcome it, even though it has
been a long time coming. Many changes are still theoretical and we are
a long way from seeing North sea carbon capture projects or some of the
other uses under discussion. However, measures that enable such
projects to be at least considered are
welcome.

The
debate provides an opportunity to put three important questions to the
Minister, which may assume greater significance if decommissioning
begins to be postponed. First, what level have Government liabilities
for relief for decommissioning reached? Secondly, how are the
liabilities likely to be distributed over future years and decades?
Thirdly, are they included in the Governments accounts or are
they another example of off-balance sheet liabilities, like PFI
projects and public sector pensions? Those questions are important. I
am not entirely clear how the future liabilities are dealt with on the
Governments balance sheet.

Many of the
current potential change of use projects are at best marginal
economically, and the potentially significant tax charges that could
have arisen on implementation of the projects were a major disincentive
to companies even starting to evaluate such projects, so the changes
appear to move us in the right
direction.

The
Opposition value all efforts to make CCS and alternative energy
generation more attractive through the tax regime. The changes remove a
barrier, but they do not, in themselves, ensure that these important
industry developments take place. Nevertheless, we welcome the
provisions, but I await the Ministers explanation of where
future liabilities are accounted for.

Ian
Pearson: I am glad that the official Opposition welcome
clause 86 and schedule 41. Their purpose is to remove tax barriers to
the reuse for other activities of oil and gas infrastructure. I shall
briefly go into detail on the schedule. It removes potential tax
barriers where oil and gas production assets are reused for so-called
change of use projects, particularly, as the hon.
Gentleman noted, carbon capture and storage, gas storage and wind power
generation.

The
schedule has three main effects. First, it ensures that a petroleum
revenue tax charge does not arise when a PRT asset is subsequently used
for another purpose. Under current legislation, when a PRT asset is
used for an activity unrelated to oil production, a portion of the PRT
relief given for the cost of the asset is clawed back. That could
entail a significant tax charge for the company

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in question and may deter it from embarking on change of use projects.
The schedule removes the possibility of such a tax charge. It has been
welcomed by the industry as well as by the hon. Gentleman.

Secondly, the
schedule will ensure that profits from change of use projects that
reuse PRT assets are not liable to pay PRT. Again, the existing rules
state that income derived from PRT assets is liable for PRT no matter
how the asset is used. However, change of use profits are clearly
beyond the intended scope of the PRT regime, which was designed
primarily to capture the super-profits from oil and gas production.
Consequently, the schedule will remove such income from the scope
of
PRT.

Finally,
the schedule will ensure that companies that embark upon a change of
use project can still gain access to the same tax relief for the cost
of decommissioning infrastructure that they would have had at the end
of oil and gas production. Again, that will remove the existing
perverse incentive to decommission infrastructure, rather than to reuse
it, which is an objective we support.

The
Government believe that the UK will gain major benefits from the
removal of the barriers to change of use projects. As I have mentioned,
such projects can make a significant contribution to reducing carbon
emissions and to ensuring that the UK has a secure energy supply. As
the hon. Gentleman will be aware from todays statement in the
House on climate impact projections, there is a need to continue the
drive to develop a low-carbon economy in the UK. We should ensure that,
where appropriate, the tax system provides sufficient incentives for
things that are public policy goods and removes perverse incentives not
to do such things. That is widely accepted as the right thing to
do.

It
is important to recognise that such projects have the potential to
bring investment and employment to the North sea long after the
production of oil and gas has ceased. In addition, the deferral of the
decommissioning of oil and gas infrastructure by companies will benefit
the UK by deferring the point at which the Exchequer must give tax
relief for decommissioning expenditure. Given the economic
circumstances, that will benefit Government
overall.

The
clause will ensure that when a company is faced with whether to
decommission depleted oil and gas infrastructure or reuse it for a
change of use project, it will not be deterred from engaging in
activities that could be beneficial to the company and to the UK as a
whole. That is why I believe it should stand part of the
Bill.

The
hon. Member for Hammersmith and Fulham mentioned decommissioning costs.
Those are currently estimated at £20 billion. Tax relief could
lead to the Government effectively paying 50 per cent. of that. The
time scale will depend on how and when the assets are decommissioned.
That will depend on a range of variables, such as the prevailing oil
price.

I
am not currently able to advise the hon. Gentleman on accounting
practices, but am more than happy to write to him with the
detail.

Mr.
Hands: I must say I am surprised that the Minister is
unable to tell us what is the accounting practice for this potential
liability of up to £10 billion. That sounds

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like rather a large amount of money to be unaccountable. Is he sure that
he is unable to provide us with more certainty about where it is
placed?

Ian
Pearson: I am at this stage, but the hon. Gentleman has
raised a valid point. I am happy to write to him and Committee members
with further information on
that.

Clause
86 and schedule 41 are important and I urge hon. Members to support
them.

Question
put and agreed
to.

Clause
86accordingly ordered to stand part of the
Bill.

Schedule
41 agreed
to.

Clause
87

Former
licensees and former oil
fields

Question
proposed, That the clause stand part of the
Bill.

Mr.
Hands: I shall be fairly brief on clause 87 and schedule
42 as we are advancing towards clause
89

The
Chairman: Order. I am sorry to interrupt the hon.
Gentleman. Speaking of being brief, I warn the Committee that by 4
oclock we will have sat for three hours. At about that time, I
propose to have a short
adjournment.

Mr.
Blizzard: On a point of order, Mr. Atkinson.
Thank you for that announcement. We had an agreement to finish clause
90 and the corresponding schedule today. I think the mood of the
Committee is that it would be better if we could finish it without
adjourning, so I hope that we can have a common purpose and move that
way. Would you permit us, if necessary to go a little beyond 4
oclock in order to expedite
that?

Mr.
Hands: Further to that point of order, Mr.
Atkinson, we did not have that agreement. I was saying that we should
stick to the schedule laid out by the Government at the beginning of
the Bill, which would mean that we will continue discussing oil when we
return on Tuesday. Clause 89, schedule 44, on which we intend to have a
Division, is very
substantial.

The
Chairman: These are matters, not for the Chair, but for
the usual channels. I am giving guidance to the Committee because,
unlike honourable Members, the Clerk and I cannot keep going out, so
after about three hours, it is useful to have a break. If the Committee
is aiming to get towards the end of the business on oil, I will be
flexible about when we adjourn, however, at 4 oclock
or slightly after, I propose to adjourn the Committee. That is in the
hands of Committee Members and the usual
channels.

Mr.
Hands: Thank you, Mr Atkinson, for that clarification. I
mentioned clause 89, but we are on clause 87 and schedule 42. Schedule
42 deals with the oldest, or first-round licences, that are due to
expire in 2010 and proposes a way in which extended licences can be
issued, and decommissioning relief against petroleum revenue tax, PRT,
can be carried over for the licence

Column number: 511

holder, after both extension and expiry. The existing position for PRT,
which applies, as we know, only to fields developed before 1993, was
summarised in the Governments consultation response in
November:

When
a field reaches the end of its productive life and decommissioning
costs are incurred, to the extent that such costs are deductible for
PRT purposes, any losses arising can be carried back for offset against
profits from the field without limit, subject to the retention of the
licence or within two chargeable periods of the relinquishment of the
licence.

As
I understand the PRT regime, a chargeable period is a period of six
months. I think the Minister is confirming that. So, under current
legislation, PRT relief for decommissioning expenditure is not
available to a company if those costs have been incurred for more than
12 monthstwo PRT periodsafter it has ceased
to be a licence holder in respect of that taxable field. The new rules
will allow relief for such expenditure, but will also ensure that any
income that may arise in respect of the assets in question will also be
chargeable to
PRT.

The
changes, as I understand them, provide necessary clarity on what should
happen if a license expires, or is due to expire, before this can
happen. As it stood, if a company ceased to be a licensee, its
obligation to decommission would remain, but finding itself outside the
PRT regime, it would not have been able to relieve this cost against
the PRT it had previously paid. Companies will now continue to be
deemed to be licence holders for PRT purposes after the licence has
expired. The extended licences themselves will be deemed to have
expired at the point when production stops. We think this is a
relatively neat solution to that problem, it has been broadly welcomed
and addresses a real issue. We therefore see no reason to oppose the
solution that DECC has put forward and that schedule 42 would
implement.

Ian
Pearson: I am very pleased that the Opposition is in
agreement with clause 87 and schedule 42. We have discussed this with
industry, we believe it is the right way forward and I welcome the hon.
Gentlemans
support.

Question
put and agreed
to.

Clause
87 accordingly ordered to stand part of the
Bill.

Schedule
42 agreed
to.

Clause
88

Abolition
of provisional expenditure
allowance

Question
proposed, That the clause stand part of the
Bill.

3.45
pm

Mr.
Hands: Clause 88 and schedule 43I presume that it
will be convenient to debate the schedule at the same
timerelate to the abolition of the provisional expenditure
allowance. Provisional expenditure allowance has, as the Government
suggest, ceased to be appropriate. It was intended to provide relief
against PRT for start-up costs, but as no field that has started up
since 1993 is subject to PRT, it is no longer required. Moreover, its
continued existence has caused claw-back problems for some companies
that have been hit by what the Government refer to as unintended and
detrimental tax charges. Further provisional expenditure already
granted will be

Column number: 512

clawed back in the following 12 months. No one appears to be in favour
of its retention, and we do not represent an
exception.

As
we know, PRT differs from other taxes in that expenditure relief does
not reduce a companys tax liability until the expenditure has
been claimed by the company and allowed by HMRC. When the expenditure
has been claimed and allowed, it reduces PRT for the next half-yearly
assessmentthe six-month PRT assessment periodrather
than necessarily for the half-yearly period in which it was
incurred.

To compensate
somewhat for the consequential timing disadvantages that might,
therefore, ensue, section 2 of the Oil Taxation Act 1975 provides for a
provisional allowance for each chargeable period. That provisional
allowance is calculated under section 2(9)(a) and section 2(11) of the
Act by reference to two components. If the first is greater than the
second, the difference between them is the amount of provisional
allowance to be given in the assessment together with any expenditure
already allowed and linked to the chargeable period. Conversely, if the
second exceeds the first, no provisional allowance is due. This is a
rather complicated set of provisions. We have checked the Act to ensure
that we have got things absolutely
straight.

The
first of the two componentsremember that if the second exceeds
the first, no provisional allowance is dueunder section 2(9)(a)
of the 1975 Act is 5 per cent. of the amount included in the
participators returnunder section 2(2) of the 1975
Actin respect of its estimate of the total sale proceeds or
market values computed in accordance with section 3(2) of sales and
appropriations of oil for the chargeable period. The
participators estimate of the market value of non-arms
length disposals is used regardless of whether the oil taxation office
subsequently agrees a higher or lower figure to be included in the
assessment under section 2(5)(b) and section 2(5)(c) of the 1975
Act.

If
the participator fails to submit a return and an estimated assessment
is made, no provisional allowance is available. Once a return is made,
a provisional allowance based on the incomings returned is made
automatically.

Let
me return to our consideration of whether the second component exceeds
the first. The second component is the amount of any expenditure
claimed under sections 5 and 6but not any related
supplementwhich was incurred in the chargeable period in
question and which has been allowed by the oil taxation office for
inclusion in the assessment for that chargeable period. That is an
outline of what we have in front of us, which this clause and schedule
are seeking to abolish.

As for the
clawback, the 5 per cent. allowance is provisional and section 2 of the
1975 Act prescribes a clawback of the relief given. Subject to
additional rules, also in section 2, any provisional expenditure
allowance given in a particular chargeable period is clawed back in the
next but one chargeable
period.

Section
2 of the 1975 Act modifies the basic rule in two ways. Under section
2(10)(a), where expenditure allowed in a chargeable period was incurred
in the immediately preceding period and provisional allowance was given
in that period, a further adjustment is required. The clawback in the
computation of any 5 per cent. provisional allowance given in the last
but one chargeable period will be increased by an amount equal to the

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expenditure now allowed which was incurred in respect of the immediately
preceding chargeable periodthe six-month periods under which
the petroleum revenue taxation operatesor the 5 per cent.
provisional allowance of the immediately preceding chargeable period,
whichever is the lower figure. However, under section 2(10)(b) of the
same Act, the clawback of provisional allowance given for the last but
one chargeable period is reduced by the equivalent amount of any
increase made under section 2(10)(a) of the Oil Taxation Act 1975 in
the assessment for the immediately preceding chargeable
period.

My
point is that those seem to be fiendishly complicated regulations, and
the clause and the schedule before us appear to have the worthy aim of
simplifying our tax code and seeking to extract those regulations from
it. No one seems to favour their retention, and we certainly do not
represent an
exception.